Question

Jay's Jams Inc. was just established with an investment of $3 million. Jay expects his company to generate free cash flow of $800,000 a year for the next 10 years. If Jay's cost of capital is 15%, find the market value and book value of his company.

Answer 1

Book Value is $3 million and market value is $4,013,333.

Step-by-step explanation:

The book value of the project is $3million and the market value of the company is as under:

The market value of the project can be calculated using the annuity formula which is as under:

Present Value of the investment = Cash flow * Annuity Factor

The annuity factor can be calculated using the following formula:

Annuity Formula = [(1-(1+r)^-n) / r ]

Here r is 15% and n is 10 years. So by putting the values in the Annuity equation we have:

Annuity Formula = [(1-(1+15%)^-10) / 15%] = 5.02

By putting this formula in the present value formula:

Market value of the investment = $800,000 * 5.02 = $4,013,333